Months into a federal investigation of stock-option backdating at Apple, prospects for a criminal case against powerhouse CEO Steve Jobs appear dim.

A Mercury News examination of a massive 2001 stock-options grant to Jobs that was backdated through bogus documentation - the central focus of the federal probe - shows there is scant evidence, if any, to support criminal charges against the Silicon Valley icon.

Despite Apple's disclosure that Jobs approved widespread backdating at Apple, there is no evidence he directed the backdating of his own grant or covered it up afterward, based on a review of regulatory filings and interviews with lawyers intimately familiar with the grant who asked not to be identified.

Without such proof, federal prosecutors cannot show the type of egregious misconduct they've targeted in the blossoming options scandal.

A close review of the events that led to the controversial grant reveals that the backdating emerged from a good-faith, although clumsy, attempt by Apple's board of directors to reward its star chief executive for resurrecting a moribund company.

A decision not to indict Jobs would carry enormous significance for Apple and its shareholders, who have fretted the scandal might lead to the CEO's ouster. His loss would be a body blow to the company. Jobs is not only Apple's chief spokesman and evangelist, he is Apple, playing a key role in decisions big and small.

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But Jobs has been on the hot seat since last year, when Apple acknowledged it backdated thousands of grants to employees, sometimes at Jobs' direction.

An internal investigation released in December found no evidence of wrongdoing by Jobs, but that did not remove the cloud of suspicion over the company's powerful CEO. The Securities and Exchange Commission and the U.S. Attorney's Office in San Francisco have continued to look into the matter, including interviewing Jobs - and signs point to the SEC soon finishing its investigation.

Assistant U.S. Attorney Timothy Crudo, who is heading the Apple criminal investigation, declined comment. So did Mark Pomerantz, Jobs' attorney.

Considerable defense

From the start, the focus has been Jobs' 2001 receipt of 7.5 million options that were backdated through minutes of a board of directors meeting that never occurred. But while others involved in the falsified minutes may face consequences, Jobs appears insulated against criminal prosecution and perhaps SEC action.

If Jobs avoids criminal charges for the 2001 grant - easily the most explosive revelation in Apple's backdating report - he may avoid criminal charges entirely.

He has a considerable defense against any charges for his role in Apple's backdating because there is little, if any, evidence he knew of its accounting implications.

An internal audit also found no wrongdoing by Jobs at Pixar, where similar evidence has turned up general backdating of options on his watch as CEO there.

"When you start thinking about lying, cheating and stealing, there's a mental state that you know what you're doing is wrong," said Jeffrey Bornstein, a former federal prosecutor in San Francisco not involved in the Apple case. "If you don't appreciate that, it's very difficult for the government to show that you're a criminal."

The SEC could still punish or fine Jobs. But the agency has not notified Jobs of plans to bring civil charges against him, according to a lawyer familiar with the SEC probe.

Apple is perhaps the highest-profile of the approximately 160 companies federal regulators are investigating in their broader backdating probe. Backdating is the practice of retroactively assigning a date, typically one conveying a favorable price, to an options grant.

Backdating isn't necessarily illegal. But companies and executives have gotten into trouble for not properly accounting for backdated options and not disclosing them to investors and regulators. Current and former federal prosecutors knowledgeable about the probes say investigators are focusing most on cases where there is proof that executives hid backdating or used the tactic to profit themselves.

In Apple's case, the company has admitted the grant to Jobs, approved in December 2001, was backdated by two months and that the grant documents were falsified, an act that has been condemned by everyone involved in the matter.

But it was a star-studded board of directors that approved the favorable grant date - not Jobs - to end a tough negotiation to compensate him for his leadership. Among those who approved the grant were Arthur Levinson, Genentech's president and CEO; Larry Ellison, Oracle's powerful leader; Bill Campbell, Intuit's former CEO; and Millard Drexler, former president and CEO of Gap. Jobs is also on the board, but did not vote on his own grant.

Legal experts and lawyers familiar with the grant say it would be difficult for prosecutors to base a securities fraud case against Jobs since his grant was approved by the board. That's especially important because most securities fraud indictments allege corporate boards were deceived.

"Jobs can take the defense, `What do I know about the proper accounting for this transaction? I didn't keep a secret from anybody and assumed the accounting would be proper,'" said Joseph Grundfest, a Stanford law professor and former SEC commissioner. "That would seem to distinguish the Apple situation."

So what actually happened with the 2001 grant? According to lawyers familiar with the matter - and a review of the company's public filings - the grant began with an effort by the board to reward Jobs for helping resurrect Apple.

When Jobs returned to the company in 1997, it was near insolvency. After forcing out CEO Gil Amelio and taking on the job himself on an interim basis, Jobs turned the company around: He announced a key deal with Microsoft, slashed product lines, introducedinnovative new products such as the iMac and updated its aging operating system.

Sinking options

Jobs received 30,000 stock options when he rejoined Apple's board. But he accepted just $1 in annual salary when he took the CEO job. By fall 1999, the board wanted to reward him more meaningfully for his work.

In December, it gave Jobs a $44 million Gulfstream V - and paid the nearly $41 million in taxes on it. The next month, the board gave him 10 million options. The grant was a record at the time in terms of the number of shares; today, it's equivalent to 40 million shares after stock splits.

But thanks to the stock market crash, those options were well underwater by mid-2001, with a strike price - that at which he could buy the stock - more than double Apple's then-market price. Jobs wanted to replace them, and the board wanted to appease him.

On Aug. 29, 2001, the board signed off on giving Jobs a new grant of 7.5 million shares. But the CEO and the board continued to negotiate on what to do with Jobs' underwater options from the previous year.

The talks dragged on through the fall, taking Apple into another fiscal quarter and preventing the board from being able to use the August date for the new options. But the board believed it had already approved the options for Jobs and that finalizing the deal was merely a matter of settling terms and inking the paperwork.

By December, the board and Jobs finalized the terms for the 7.5 million options - equivalent to a split-adjusted 15 million options today - and let him keep the older underwater options.

But there was one hitch. Apple's stock had risen by more than $3 a share since the grant was first approved in August. The board didn't want to reopen negotiations to account for the stock's rise, but the directors also didn't want to see Jobs penalized with higher-priced options when they were taking the position that they'd really ratified the terms in August.

So, the board set the strike price at the stock's value on the October date on which its compensation committee had met to discuss - but not approve - Jobs' grant. The date ended up being days before Apple announced its first iPod, which gave its stock a boost. But lawyers familiar with the process said that was a coincidence.

Apple's stock price was $2.71 a share lower on the contrived grant date of Oct. 19, 2001, than it was on Dec. 18, when the grant was actually finalized. Thus, on the date Jobs received the grant, he was theoretically already $20.3 million in the money.

The board sent out an e-mail to the company's legal department saying the deal was done and that Jobs' options should carry the October grant date. At the time, Apple backdated options as a matter of course, the company revealed last December in SEC filings. Backdating Jobs' grant wouldn't have been seen as extraordinary, the lawyers say.

That's where the fictitious meeting minutes come in. There is no evidence the board, or Jobs, knew that the grant would be documented through false minutes of a board meeting that didn't occur. But that is what happened.

Wendy Howell, an in-house lawyer at Apple who typically wrote up meeting minutes related to options grants, drafted the minutes for Jobs' grant. General Counsel Nancy Heinen signed them.Whether Howell was acting on her own or at the behest of Heinen when she falsified the minutes is a point in dispute between the former Apple employees.

But nothing points to Jobs ordering the October date, or knowing about the false meeting minutes, lawyers familiar with the matter say. A CEO would not typically review board minutes.

`$64,000 question'

"He knows nothing about his own grant," said a lawyer familiar with Jobs' defense, which he presented to prosecutors in a meeting earlier this year. "People kept the minutes thing from him. When it was done, it was over for him. He wouldn't have seen that stuff."

To be sure, some maintain Jobs played a more active part in the backdating of his 2001 grant. As CEO and as the grant's recipient, he would have been in a position to know his grant was backdated further than was typical at Apple, argues Mark Molumphy, lead lawyer on a lawsuit on behalf of shareholders and the company related to Apple's backdating. "Could you justifiably believe this was an appropriate thing to do?" Molumphy asked. "The question is ... who knew about the falsified minutes? That's the $64,000 question."

The SEC also is expected to decide how to proceed with the Apple case in the next several months. In addition to scrutinizing Jobs' role, regulators are weighing charges against Heinen and Fred Anderson, Apple's former chief financial officer, according to sources familiar with the probe. Unlike Heinen, Anderson's backdating troubles are not related to Jobs' grant, say sources familiar with the matter.

Apple's internal audit singled out Anderson and Heinen for their role in backdating at the company, saying their involvement "raised serious concerns."

The Jobs grant is not without its ironies. If he had signed off on the deal in August, rather than continuing to negotiate, his options would have carried a lower price than they eventually did.

Even with the backdating, by June 2002, Jobs' 2001 grant was underwater as well. In March 2003, Apple's board tried again to do right by Jobs, giving him 5 million shares of restricted stock - the equivalent of 10 million shares today - in exchange for all of his underwater options. Restricted stock includes limits on when it can be sold.

Last year, Jobs handed back to Apple 4.6 million of his restricted shares - worth $295 million - to pay the taxes on them. His remaining restricted shares are now worth about $494 million.

But given the rise in Apple's stock over the past four years, even that turned out to be a bad deal for the iconic CEO. Had he held on to all of his options, they would be worth about $4 billion right now, even if the 2001 grant had been given the December date.